Stay in your own lane - Investing in traffic

By Jarrett B. Topel | June 27th, 2017

I love living in the Bay Area, and in my view, there are very few drawbacks to calling this part of the world home. Now I am certainly biased in this regard, since both my wife and I grew up here and have lived most of our lives here, but I have seen a fair bit of this world, and there is definitely something special about Northern California, and the Bay Area in particular.

One issue, however, which has become increasingly problematic in recent years, is the traffic. I realize that I am going to sound like the typical old-timer here, lamenting the good ‘ol days when things were simpler, but I swear we used to call it rush-hour traffic. As long as you didn’t drive certain routes at certain times, you could generally make good time getting around the Bay Area. Not so anymore-now it’s just called traffic, and it doesn’t seem to matter when you are driving, or where you are going, inevitably, you are going to get stuck in a traffic jam.

I was stuck in one of these inevitabilities recently, and got to thinking that driving in traffic is a lot like investing. The more I thought about it, the more I began to understand that the lessons we learn (or fail to learn) while driving in traffic might be analogous to those we should adhere to in order to successfully invest for the long-term.

Let’s start with the assumption that, in general, people who are driving all want to get to their destination as quickly as possible, and in one piece, though the second part of that is a bit harder to rely on based on what we see out there sometimes. To that point, most drivers in traffic are constantly making small (often inefficient) moves from one lane to another, in an effort to gain some advantage, and reach our destination more quickly. If the lane we are in appears to be moving slowly (even for a short time), we give up on it and switch to the one that appears to be moving more swiftly. If we seem to be in the lane that’s moving along, everyone jumps in and there goes the advantage. At any given time, there are hundreds or thousands of other drivers on the road with us, doing the exact same thing, trying to get ahead by guessing which lane will be the fastest, virtually ensuring that no one ever really finds the best lane, at least not for long. And when all is said and done, don’t we usually end up getting to our destination in the same amount of time anyway, despite all of our ducking and weaving through traffic? We may feel we’ve gotten ahead for a minute or two, but then we see that same green truck we passed ten minutes ago, come rolling on by. What’s worse, all of that lane changing seriously increases our chances of a bad outcome, like getting into an accident, getting a ticket, or ending up in some kind of road rage incident. It turns out to be a whole lot of risk, for very little, if any, reward.

I believe the same is true for investing. Every day, there are millions of investors trying to gain an advantage over the rest, by making their best guesses as to what a specific stock, industry, or market is worth. If one investor thinks it is overvalued, they sell, and if they think it is undervalued, they buy (switching lanes). Everyone is constantly trying to get ahead of each other, and it is this relentless pursuit of “beating the markets”, which results in what is known as “market efficiency”, and causes the markets to actually become fairly valued over time. In the end, the actual worth of any investment, is simply the amalgamation of all of these individual guesses. And, as with driving, it turns out that more often than not, we are far better off choosing a reasonable route, and staying the course for the long-term, instead of trying to constantly outguess the investing universe as a whole. What’s more, it is unquestionably less dangerous and less stressful to invest this way.

At the end of the day, the message is simple…stay in your lane! The other lane isn’t moving any faster, so try to relax, turn on some music or have a nice conversation with the other people in your car. If you can do that, you’ll probably find that you’ve arrived at your destination sooner than you thought, and who knows, you might just enjoy the ride.

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